SS M&A Litigation Outlook - Flipbook - Page 20
ln re Essendant, lnc,
C.A. No. 2017-0931-JTL (Del. Ch. July 9, 2019)
Why it is important
Summary
In In re Essendant, Inc., the Delaware Court of
Chancery dismissed a class action suit against
the board of directors and CEO of Essendant
Inc. (Essendant), as well as Sycamore Partners
(Sycamore), a private equity firm and minority
shareholder of Essendant, arising out of the
Essendant board’s decision to terminate a stockfor-stock merger agreement with another buyer
in order to accept Sycamore’s all-cash offer. The
court concluded that the plaintiffs had not stated
a claim for breach of the duty of loyalty based on
the plaintiffs’ failure to show that the board chose
Sycamore’s offer because it was dominated and
controlled by Sycamore or out of self-interest or in
bad faith. The plaintiffs also failed to plead facts to
support the inference that Sycamore’s influence was
“so potent that independent directors [could not]
freely exercise their judgment, fearing retribution”
from Sycamore. This decision underscores the high
standards plaintiffs must satisfy when attempting
to plead breach of fiduciary duty claims premised
on the notion that a minority stockholder is a
controlling stockholder and in light of an exculpatory
provision in a company’s charter.
In April 2018, Essendant Inc. (Essendant) and
Genuine Parts Company (GPC) announced that
they had entered into a merger agreement through
which GPC would acquire Essendant in a stock-forstock deal. Three days before that announcement,
Essendant began merger discussions with Sycamore
Partners (Sycamore). Those discussions culminated
in an offer by Sycamore to purchase Essendant
for US$11.50 per share in cash. After further
negotiations, Essendant terminated the merger
agreement with GPC and announced an all-cash
merger with Sycamore for US$12.80 per share. In
response, the plaintiffs filed suit.
The court first determined that the plaintiffs would
need to state a claim for the breach of the duty of
loyalty or bad faith in order to succeed based on the
Section 102(b)(7) exculpatory clause in Essendant’s
charter. The plaintiffs alleged that the directors
breached their duties of loyalty by “acced[ing] to
the will of Sycamore as a controlling stockholder
at the expense of other stockholders.” The court
found, however, that Sycamore was not a controlling
shareholder because Sycamore neither owned
over 50 percent of “the company’s voting power”
nor “exercised control over the business affairs of
the corporation.” The court further found that the
plaintiffs did not sufficiently allege that the directors
lacked independence.
Similarly, the plaintiffs also failed to plead that
the board acted in bad faith. The plaintiffs’ bad
faith allegations were based on alleged disclosure
violations and an alleged defective deal process.
The court found those allegations insufficient
because they did not support a finding that the
alleged omissions were material and because none
of the board’s other actions – such as considering
Sycamore’s proposal or terminating the agreement
with GPC – met the high standard of bad faith.
with GPC to pursue a merger with Sycamore, which
offered a 51 percent premium to the unaffected
market price. Finally, the court rejected a breach
of fiduciary duty claim against Essendant’s CEO
because the plaintiffs only alleged one action he took
as CEO – receiving a phone call informing him of
Sycamore’s interest in a merger.
The court also considered, and rejected, the
plaintiffs’ remaining claims. First, the court rejected
a claim against the board for aiding and abetting
Sycamore’s breach of fiduciary duty because
Sycamore was not a controlling stockholder. Second,
the court dismissed a claim against Sycamore and
its subsidiary, Staples, for aiding and abetting
Essendant in its breach of fiduciary duties because
the plaintiffs did not plead facts showing actions
Sycamore or Staples took to help Essendant commit
any hypothetical breach. Third, the court rejected a
corporate waste claim against the board because the
board had a rational reason for terminating the deal
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